One often overlooked aspect of nonprofit financial management is managing towards a surplus or ensuring adequate margin to continue your organization’s mission even during lean donation years.
“No margin, no mission” is a saying often heard at nonprofit organizations. It means that without an annual surplus, your organization cannot achieve its mission.
There’s a delicate balance between being prudent stewards of your nonprofit finances and over- or under- investing in programs. Too much surplus looks as if you aren’t doing enough to fulfill your mission; deficits cause undue hardship and struggle. What’s a nonprofit to do?
Mandating a Surplus
One way to improve nonprofit financial management is to manage towards a surplus. A mandated surplus of X percent means that in any given year, a set amount of margin is set aside to act as a cushion against lean times. It’s a similar concept to putting aside money in an old-fashioned Christmas account or tucking ten dollars a week away in an account against a rainy day. For nonprofit financial management, the idea is to create a managed surplus that can be tapped into when donations or other sources of income fall.
A mandated surplus for every department in your organization may seem strange. What about the operational division? How are they supposed to create a surplus? It seems obvious that the finance, donor and membership management groups can work towards a surplus, but how do operational divisions manage it?
Departments that do not generate revenue but support other revenue-generating areas of the organization can budget towards a surplus by cutting expenses. By systemically trimming expenses, they can contribute towards the mandated surplus.
Preparing for Down Years
The economy will also rise and fall, so preparing for the down years is an essential skill of nonprofit financial management. It may not be possible to meet a shortfall through simple cost-cutting during a particularly difficult year. Mandating a surplus and banking that surplus against lean times is your insurance against having to cut essential programs or personnel in order to keep your nonprofit active during lean times.
What If You Exceed the Mandated Surplus?
Just as in some years you’ll find you have a deficit, in good years you may not only meet the mandated surplus but exceed your target goals. During such times, the Board may wish to discuss adjusting the surplus at their annual meeting. For example, if the mandated surplus target is usually 15% but an especially healthy year finds you with a surplus of 20%, the Board may wish to vote on adjusting the surplus down to 10% for a one-year term only. In this way, the mandatory surplus can be flexible without being an arbitrary number. Board participation, discussion, and voting are essential to making a flexible number work.
Tip to Make Surplus Budgeting Work
Many nonprofit organizations have successfully balanced their accounts and improved nonprofit financial management thanks to surplus budgeting. But in order to make it work well for your organization, you’ll need to focus your efforts on communications, strategic planning, and improved budgeting.
Some tips include:
- Analyze your current financial situation. A good fund accounting program can help you with generating the reports of your accounts.
- Assess each budget item, especially unrestricted funds. This is typically where surplus may be found.
- Educate and communicate with all departments within your organization to ensure that everyone understands why you are seeking a surplus and how you anticipate being able to achieve the goal.
- Align all portions of the organization towards the goal.
- Underscore how achieving margin enables you to achieve your mission (money isn’t just for money’s sake but to help your constituents).
- Develop strategic plans and budgets to achieve your goal.
- Watch the progress carefully and be ready to change course depending on how well you believe you’ll achieve your objectives.
A surplus can mean the difference between a healthy, fully functioning nonprofit organization and one that limps along hoping for the best. Don’t hope or wish for the best – plan for it. With enough margin, you can surely achieve that mission.
Beck & Company: Nonprofit Financial Management Success
Beck & Company can help with your nonprofit financial management needs. We are a CPA and business advisory firm dedicated to the nonprofit sector. Our many years of experience can help you update your financial compliance or handle all types of accounting for nonprofits. Please contact Beck & Company today for further details.